As any professional will know, the regulation of professionals, particularly those in finance, has been bolstered in recent years with regulators being granted increasing and wider powers to investigate, give judgement and impose sanctions.
In this seemingly ever-toughening environment, a key question for professionals is whether, when faced with a regulatory investigation, one can hand over privileged information, particularly when the privilege belongs to the client, who may themselves be under investigation by a regulatory body.
We reported in our Summer newsletter on the case of Shlosberg v Avonwick Holdings Ltd & Ors  in which law firm Dechert LLP was ordered to cease acting for the principal creditor of bankrupt Russian businessman, Mr Shlosberg, because it also acted for Mr Shlosberg's trustees in bankruptcy, and accordingly had had access to documents subject to Mr Shlosberg's legal professional privilege. The Court's finding confirmed that the right to assert or waive privilege did not automatically devolve to trustees in bankruptcy, rather, the bankrupt retained the right to assert or waive privilege in physical and electronic files and documents delivered up for the purposes of administering the bankrupt's estate. Click here to read the article.
In light of this finding, we comment below on how professionals facing regulatory investigations must approach the complex issue of legal professional privilege.
As Shlosberg v Avonwick confirmed, legal professional privilege is a fundamental right, akin to the right of privacy and protected by the European Convention on Human Rights. When third parties have made attempts to impinge on that fundamental right, solicitors have rightly resisted any disclosure and defended their client's right to legal professional privilege. This has resulted in a number of judgments which, notably, are not wholly consistent and do not provide clear, straightforward, guidelines on exceptions, if any, to a client's right to claim privilege in the context of regulatory proceedings. We discuss these cases below.
In Parry-Jones v Law Society , the Court was asked to consider a request by the Law Society for a copy of the law firm, Parry-Jones', client accounts in order to carry out an investigation into a complaint. Parry-Jones resisted the request on the grounds of its clients' legal professional privilege. The Court of Appeal was resolute in its judgment: "Does the power of investigation override the implied contractual confidence between solicitor and client? This is a public policy point…. If there is conflict, the power to investigate must override the confidence." Ultimately, the Court found in favour of the Law Society on the basis that privilege was always subject to legal requirements.
The next notable case on this challenging issue arrived over 30 years later in Morgan Grenfell & Co Ltd v Special Commissioners of Income Tax (SCIT) . The Claimant, a bank, was issued a notice by the tax inspector (SCIT) pursuant to s.20(1) of the Taxes Management Act 1970 requiring disclosure of documents relating to a tax avoidance scheme it had operated for its customers. The bank argued that the scheme advice, which contained advice from legal counsel as to the potential success of the scheme, was protected by legal professional privilege.
In contrast to the decision in Parry-Jones, in this case, the Court of Appeal refused disclosure of the privileged documents. The Court quashed the SCIT's notice on the basis that as legal professional privilege was not expressly dealt with in s.20(1) of the Act, it could not be construed as allowing a tax inspector disclosure of legally privileged documents.
A similar decision was reached, this time by the Privy Council, in the same year in B v Auckland District Law Society . The Council found that as the statute which compelled production of documents did not expressly exclude legal professional privilege as a justification for opposing production, the claim for privilege was protected and disclosure was refused.
Interestingly, in 2005, a solicitor struck off by The Law Society, sought to rely on the Auckland case in asserting that the disciplinary tribunal should not have had access to his client's privileged documents. However, the Court of Appeal refused permission to appeal on the basis that: (i) it was not the solicitor's privilege to claim, it was his clients; and (ii) the tribunal would have a hard time investigating improper conduct unless it could have access to documents that might be privileged in the hands of the client. On the latter point, the Court pointed out that the tribunal had sought to "protect the privilege of the clients and to preserve the Legal Professional Privilege".
While the above cases do not involve accountants, they are relevant to accountants, such as auditors or trustees in bankruptcy, who are in possession of client, privileged, documents. The cases illustrate that the answer to whether privilege is preserved in the face of a regulatory investigation is not straightforward. On a practical level, requiring the service of a notice requesting disclosure of such documents under statute, before disclosure is given, provides some degree of personal protection to accountants and should be considered in every case.